Migrating to new Energy
Paradigms (2)

Peak Oil is defined as the point at which
50% of the world's oil reserves have been consumed, and 50% remain. We all understand that oil is important to
the world economy, but just how important is it?

In October 2004 I attempted to answer this
question on behalf of a client as part of that client's long range strategic
planning process. The amount of work involved was fairly significant so I have
chosen to rely on my findings of that time for the purposes of this article.
There are two other reasons:

The purpose here is to communicate a principle. Updating the
data will not change the principle, which is this: We need to move away from our dependence on oil as soon as is
humanly possible - certainly within a decade at the absolute latest.

Looking back into history, we can see just how important the
conclusions of that exercise turned out to be. In hindsight, as things
have turned out, I was hitting the bull's eye. I am therefore highly
confident that what you will read below is very close to the truth.

The world economy "appears" to be booming
at present. That is what the politicians would have us believe. To the
contrary, I believe that what we are seeing is the lipstick on the pig. Monetary
inflation is driving an ageing cycle of world economic growth, and - because
the politicians are lying about the underlying CPI inflation rate - it appears
that this growth is real.

It is not real. Those who we elected as our representatives,
to look after our interests, have lost the plot. Crazed by their own
egomaniacal needs for self aggrandisement, they have been leading us down a
path of destruction. Recognising this fact will represent a first step towards
healing, and towards fixing the damage that has been wrought. To put it
bluntly: If we fail to recognise this, and we fail to take appropriate action,
we run the risk of runaway inflation and a final - and terminal - collapse of
the world economy. This may sound melodramatic, but I believe it to be true,
for reasons that will be presented in this series of articles.

The primary purpose of these articles is to
deliver a message of hope; to present an argument (a strategy if you like)
regarding what we might do about these economic problems which are manifesting
as a direct result of Peak Oil, so that we might avoid this terminal collapse.

The complete and integrated story is complex,
starting with mathematical evidence that the ecological environment is really a
dynamic biological organism which pulsates with a life of its own. The chart below is reproduced from an article
written by Cesare Marchetti, which appeared in the May 8th 1985 edition of New Scientist
Magazine.

The solid lines in the above chart were
derived from mathematical modelling, whilst the squiggly lines were actual
data. Even the untrained eye can see an extraordinarily accurate fit.
Unfortunately, via a process of biofeedback, the decision makers in society
have interfered with this biological process since then, but the historical fit
is remarkable. The probability of coincidence is vanishingly small.

Originally developed in the 1920s, these
equations modelled the interplay between buck and wolves in a forest. The
wolves feed off the buck. As the buck population depletes, its ability to
sustain the wolf population wanes, causing the wolf population to deplete. In
turn, this allows the buck population to replenish again; and the cycle
repeats. What I found awe inspiring at the time was that the chart above
provided raw proof that the energy market (a subset of our ecological
environment) had been behaving according to a dynamic biological rhythm of
nature. Drawing a long bow of analogy, just
as the beehive has a discrete identity which is symbiotically intertwined with
the lives of the individual bees which populate it, this model demonstrated
that the ecology has a discrete identity which is symbiotically intertwined
with the humans who populate it.

Although I am not an economist I did study
economics at University and, when I read the article in which the above chart
appeared, I was reminded of an economist by the name of Joseph Schumpeter
(1883-1950).

"Schumpeter believed that capitalism would
be destroyed by its successes. Capitalism would spawn, he believed, a large
intellectual class that made its living by attacking the very bourgeois system
of private property and freedom so necessary for the intellectual class's
existence. And unlike Marx, Schumpeter did not relish the destruction of
capitalism. He wrote: "If a doctor predicts that his patient will die
presently, this does not mean that he desires it."

Capitalism, Socialism, and Democracy [authored by Schumpeter] was much more
than a prognosis of capitalism's future. It was also a sparkling defence of
capitalism on the grounds that capitalism sparked entrepreneurship.
Indeed, Schumpeter was among the first to lay out a clear concept of
entrepreneurship. He distinguished inventions from the entrepreneur's
innovations. Schumpeter pointed out that entrepreneurs innovate, not just by
figuring out how to use inventions, but also by introducing new means of
production, new products, and new forms of organization. These innovations, he
argued, take just as much skill and daring as does the process of invention.

Knowing this, I was humbled by the
following chart which is also reproduced from Marchetti's article.

This chart overlays onto the first chart
the emergence of (entrepreneurial) innovations as represented by the number of
patents registered at the patent offices - and yet another fascinating fact
manifests: At the point that the median of the chart of the new wave of
innovations intersects the chart of the newly emerging energy wave, the
world economy begins to take on a new vibrancy.

One foundational facilitator of economic
activity is transport. Without transport, your lettuces, as an example, will
not be able to be delivered from the farms to the supermarkets, as James Dean
dramatically demonstrated in one of his classic movies. Thus, an implication of
the above chart is that one foundational cornerstone on which the emerging wave
of energy related innovations is predicated, will be new 'modes of transport'.
The following chart validates this observation:

There will be those amongst the readers of
this article who will remember the name "Kondrat'eff". He was a Russian
economist who postulated that the world economy pulsated to a 55 year beat.
This latter chart demonstrates that he was substantially correct - that is,
until the Central Bankers got it into their arrogant heads that they could manage
the forces of Nature.

Interim
conclusion: Emerging energy paradigms drive
technological innovations by entrepreneurs, which, as a consequence of their commercialisation
and market penetration drive the world economy.

Armed with this understanding, we see that
the US's
(and Australia's)
failure to ratify the Kyoto
protocols was life threatening to all of humanity. The core issue had nothing
to do with CO2 emissions. The core issue had to do with the march to market of
new energy related technological innovations which would drive the world
economy. Failure to ratify the Kyoto protocols was an attempt to block the
forces of Nature so as to protect the interests of those whose financial interests
were dependent on the previous (oil and coal) related energy paradigms.

Armed with this understanding, the
behaviour of the World's Central Bankers is exposed for what it is: foolishness
and arrogance. The Central Bankers genuinely (but mistakenly) believe that, by
managing the money supply, they can flatten the amplitude of a repetitive cycle
of a biological phenomenon of Nature. The economy pulsates with a strong
heartbeat of its own. It has no need of pacemakers or defibrillators.

From another perspective, the Central
Bankers and Politicians should understand this: There will be consequences if
you attempt to 'manage' the biological forces of Nature. The consequences of interfering with the
economy's Natural process of inhaling and exhaling will be death by barotrauma.
If the lungs are not allowed to exhale, the patient will die because his lungs
will eventually burst from all the monetary oxygen you are pumping into them.

Validation
With the melodrama behind us, let's see if
we can prove the point by reference to hard financial facts. We need to
communicate with the politicians and bankers by means of a hard-nosed language
that they can understand - the language of money.

Step 1 will be to quantify the size of the
World Economy. At the time that I drafted the following table - the most recent
numbers available were based on 2002 GDPs expressed in 1995 dollars.

Given that we are trying to quantify the
importance of oil, it was necessary then to quantify the revenue stream that flowed
from producing the then 74 million barrels of oil per day at the then
prevailing price of US$45 per barrel.

But it doesn't end there. Oil facilitated
the development of the Internal Combustion Engine, the Jet aircraft engine,
roads, panel beaters, car insurance, etc. So, if we quantify the revenue
streams of all the industries which would not have existed if it were not for oil,
we arrive at the following:

Table
2:Summary:

Multiplier
Effect

For those readers who have never heard of
the "Multiplier Effect" the spreadsheet below will be used as a basis for
explaining it:

Table
3:

In simple terms, the way to interpret the
table above is as follows:

If you earn $100, and if you save 10% and
spend 90%, then your $90 spending becomes income in the hands of the next guy
who, in turn, saves 10% and spends 90%, or $81.00. That $81 represents income
in the next guys hands and so on.

After five cycles of spending, the total
income that has been generated by the continuing circulation of your original
$100 has added up to $409.51.

Clearly, for the world economy as a whole,
the "savings rate" is extraordinarily important, so I also researched that
number at the time, and this is what I came up with:

Now let's look at what happens if we take
$10.50 and multiply it using an assumed savings rate of 4.39%:

Table
5:

Hmm? If we talk in terms of percentages
rather than dollars, the 10.5% of the world's GDP grows to become 99.62% of the
world's GDP after twelve cycles assuming a savings rate of 4.39%.

So the ultimate question that raises its
head is: How long will it take for one cycle to complete? If, for example, it
takes one month for one cycle to complete then oil and related industries
"drive" 99.62% of the entire planet's annual income.

Alternatively, if it takes two months for a
cycle to complete, then oil and related industries will drive 56.48% of the
entire world's GDP (adding up the income column for periods 1-6). However, in
this case there will also be a residual impact from the tail end of the
previous year's income which will still be working its way through the system.

It follows that "Velocity of Money" is the
final determinant of GDP but, unfortunately, to my knowledge there's no
accurate way of quantifying the rate at which the cycles complete. Suffice it
to say that oil and related industries have a major impact.

Comment:

There are very few economists who would
agree with this way of presenting information. Typically, they would argue in
terms of Primary, Secondary and Tertiary (Service) Industries. They would argue
that mining, farming and fisheries are the original source of income and it's
the income of all Primary Industry that would drive the final economy. I
would argue that such an approach is purely theoretical. The practical reality
is that without artificial energy to augment human endeavour, there would be
almost no mining, virtually no broad-acre farming, and very little deep sea
fishing. There would be no electricity to power transport or communications;
and we would find ourselves back in the same position where Homo Sapiens found
himself when he emerged from the last Ice Age into the current Holocene
Interglacial Warming Period.

Conclusions:

1.
Energy in general and oil in
particular "drives" the world economy.

2.
Mega economic cycles wax and
wane arising from the emergence of entrepreneurially driven technological
innovation which, in turn, is umbilically linked to the emergence of new energy
paradigms, which seem to pulse with a biological rhythm.

3.
The political leaders of the
USA and Australia, proceeding from the misguided view that they were protecting
their domestic economies; or with the immoral objective of protecting vested
interests of the oil and coal lobbies at the expense of the broader communities
whose interests they were supposed to be protecting (you choose which
explanation you like because it doesn't really matter) blocked the emergence of
the next wave of technologies when they failed to ratify the Kyoto protocols. (Author's note: Perhaps they performed an
unwitting service. I would argue that Nuclear Fission is not the way to go,
even though Marchetti seems to think it is)

4. Flowing from this failure, the
next generation technologies that should have been waiting for investment were
stunted in their growth because they had no latent market demand to drive their
commercialisation. Nevertheless, the misguided Central Bankers, believing that
they had the power to manage the world economy by pumping money into it, caused
a tidal wave of money to flood into a world economy whose oil based
technologies were tending towards market saturation in the West.

5.
Because this tidal wave of
money could not be channelled into appropriate investment, it was diverted into
creating massive (and unnecessary) manufacturing capacity in the East, and
towards excessive consumption in the West. Debt levels rose, and asset price
inflation was the natural consequence. The Property markets, commodity markets
and the share markets boomed, giving rise to a false sense of well being.

Epilogue
(But hopefully not epitaph)

Question: What will happen to world GDP if
the oil price rises from $45 a barrel to (say) $70 a barrel?

If oil rises to $70 a barrel, then the 74
million barrels a day would represent:

$70 X 365 X 74,000,000 = $1.89
trillion

If volumes associated with the economic
activity of everything else other than oil remain constant - i.e. If the
velocity of money does not change, then prices would rise across the board, and
that $1.89 trillion would still represent 2.87% of the world's
economy.

In dollar terms, the World Economy would
grow from $42.3 trillion to become $65.87 trillion. That's inflation of: 55.7%

Do we really think that the size of the
whole pie grows by 55.7% in real terms as a result of the rise in the oil
price? Are we really that dumb?

More concerning is this:

If GDP remains constant at $42.3 trillion,
and an additional $675 billion is diverted to be spent on oil (at wholesale
prices), then that $675 billion will no longer be available for expenditure in
other markets. The volume underlying GDP
will shrink by $675b/$42.3

= 1.6%

The reader is urged to take a second look
at "Table 2" above, and at the item marked "Oil value add" = which contributed
a further 2% to world GDP.

This number was derived by adding a mark-up
from the per barrel price to the per gallon price at the gasoline pump. Industry practice is to pass on the percentage
price rise to the consumer, as opposed to dollar price rise. The more likely volume
decline (if there were no price inflation in the GDP numbers) would be
something over 2.0% as a consequence of slowing velocity of money.

It follows that the 2001-2006 inflation numbers as shown in Table 6 below
cannot be trusted.

Logically, what will actually happen if the
oil price stabilises at around $70 a barrel will be a mixture of the following:

Some (significant) price inflation of World GDP

Some real growth in some areas of newly emerging industries

A slowing down in the velocity of money, and a contraction of
volumes in some industries - for example, the US motor car industry, new
property development, other.

The real GDP (adjusting for price
inflation of the oil price) will stay at roughly $42.3 Trillion, or it may rise
a couple of percentage points as a result of growth in India and China (which,
in 2002 contributed a combined 5% to world GDP). If the politicians tell you
anything else then fire them! They are either lying to you, or they don't
understand the macro issues. Even China is experiencing capacity
problems at this time, and is having to pay higher wages to attract labour; and
higher raw material input prices for commodities.

There is no question that inflation is
rearing its head. That's why the Dow Jones Industrial Index broke to a new high
recently.

In my view, the world is probably
experiencing something it has never experienced before. "Stagflation" is when
the economy stagnates and we experience inflation. What do you call it when we
experience inflation and a simultaneous contraction of output volume?

About two months ago I watched a TV
interview of an Australian pensioner who could only have been an accountant
when he was gainfully employed. Every week, since the beginning of 2001, he had
religiously filed and recorded all his grocery purchases. Because he is a
pensioner on a fixed income, his purchasing habits have not changed - so his
personal experience is an accurate reflection of the effect of price inflation
on his supermarket spending (food, cleaning materials).

The bottom line is that he has personally
been experiencing a 12% (twelve percent per annum) compound growth rate in
price inflation. I believe him because I can "feel" that has been happening to
me. You can too.

In a cynical tribute to our political and
banking leaders, I took the trouble to research the Money Supply (M2) numbers
and the (Official) CPI numbers in the USA over the following periods:

1913 - 1959 (The Fed was established in 1913, and the technique
of measuring M2 changed in 1959)

1959 - 1970 (1970 was the last 'honest' year. In 1971, Tricky
Dick Nixon closed the Gold Window, and the rot started to set in).

1971 - 1981 (1981 was the year before the Reagan Administration
took a conscious policy decision to become a deficit sovereign nation, and
thereby use the US
consumer to "drive" the world economy

1982 - 2000 (2000 had the Y2K problem, and it was in that year
that the politicians and Central Bankers decided to throw all caution to
the winds. They started cooking the CPI statistics around that time)

2001 - 2006 (Note: M3 numbers were no longer available from February 2006 for reasons that only
"Sir" Alan Greenspan can explain).

The numbers in the 1959-1970 row and those
in the 2001-2006 row are fairly close; but the main differences between those
two periods are that:

* we now have a $60 trillion risk exposure to derivatives which
industry was in its infancy then

* the US Public (Government) debt is around $9 trillion which did not
exist then

* "market saturation" had not yet manifested in the USA in the
earlier period.

Here is a chart of market penetration of
the motor car market as shown by Cesare Marchetti as it was in 1985. Note how
the market for motor cars in most Western countries other than the USA seemed to
be approaching saturation just at the time that the Volterra Lotka model was
forecasting peak oil to arrive.

Overall
Conclusion

The rise in the oil price is being
accommodated (or driven; you choose) by loose monetary policies of the Worlds
Central Bankers and is having a massiveimpact on world-wide inflation. The stock markets
are rising because of this inflation - reflecting an increase in underlying
dollar profits which cannot possibly be being matched by volume growth. More likely, volume contraction is being
masked by accelerating price inflation. The fact that the politicians are
trying to tell us that everything is just fine is a sign-off that the current
political system has passed its "use by" date. If we don't kick these clowns
and court jesters out of office, and soon, we may find ourselves with a
ruptured and irreparable world economy.

Against this background, I have been
receiving (thankfully limited) "hate mail" from some people who are questioning
everything from my sanity to my loyalty to my integrity because I am asking
questions about the linkage between CO2 emissions and Global Warming. Well, I'll say one thing: The Global Warming
drama is certainly serving to take our minds off the impact that developments
in the oil industry are having on the Global Economy. I am not a conspiracy
freak. What I believe we are witnessing is a natural, fear induced manifestation
of rationalisation and denial. There is a sort of emotional hysteria washing
across the face of the planet.

Fortunately, there are solutions to our
problems! Above all, what will be needed is courage and clarity of purpose. In
regard to the latter, we need to avoid running in panic into the arms of the
wrong energy technology. We need to keep our heads. Perhaps it will help to
read the following poem written by Rudyard Kipling:

Since 1987, when
Brian Bloom became involved in the Venture Capital Industry, he has been
constantly on the lookout for alternative energy technologies to replace fossil
fuels. He has recently completed the manuscript of a novel entitled Beyond
Neanderthalwhich he is targeting to publish within six to nine
months.

The novel has been
drafted on three levels: As a vehicle for communication it tells the light
hearted, romantic story of four heroes in search of alternative energy
technologies which can fully replaceNeanderthal Fire. On that
level, its storyline and language have been crafted to be understood and
enjoyed by everyone with a high school education. The second level of the
novel explores the intricacies of the processes involved and stimulates
thinking about their development. None of the three new energy technologies
which it introduces is yet on commercial radar. Gold, the element,
(Au) will power one of them. On the third level, it examines why
these technologies have not yet been commercialised. The answer: We've got our
priorities wrong.

Beyond Neanderthal
also provides a roughly quantified strategic plan to commercialise at least two
of these technologies within a decade - across the planet. In context of
our incorrect priorities, this cannot be achieved by Private Enterprise.
Tragically, Governments will not act unless there is pressure from voters. It
is therefore necessary to generate a juggernaut tidal wave of that pressure.
The cost will be 'peppercorn' relative to what is being currently considered by
some Governments. Together, these three technologies have the power to lift
humanity to a new level of evolution. Within a decade, Carbon emissions will
plummet but, as you will discover, they are an irrelevancy. Please register
your interest to acquire a copy of this novel at www.beyondneanderthal.com . Please
also inform all your friends and associates. The more people who read the
novel, the greater will be the pressure for Governments to act.